Author Question: If the marginal propensity to consume is 0.8 and if government spending (G) rises by 50 while ... (Read 70 times)

Alygatorr01285 · **on:** Jun 30, 2018

If the marginal propensity to consume is 0.8 and if government spending (G) rises by 50 while investment (I) falls by 20, by how much will equilibrium income rise?

a. 12
b. 10
c. 30
d. 120
e. 150

Question 2

What are the effects of a financial crisis on short-run aggregate supply? How might long-run aggregate supply be affected?

What will be an ideal response?

livaneabi · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

E

Answer to Question 2

A financial crisis affects short-run aggregate supply by first affecting aggregate demand. The decline in economic activity that results from disruption of credit markets causes output to fall below potential output. The resulting slack in the economy prevents producers from raising prices as much as they otherwise would, so both inflation and expected inflation decline, shifting the SRAS curve down. If the financial sector's ability to channel funds to productive opportunities is not quickly restored, businesses will be unable to utilize resources as efficiently as before; the long-run aggregate supply curve has shifted to the left.